Q. I have 15 lakhs white money in my saving bank account. I want to transfer it to my wife’s personal account as a fixed deposit. Will she need to pay income tax for that amount or the monthly interest for that amount?
A. As per Income Tax Act, interest is also a source of income and the interest source is considered under head “other sources of income” of an individual. Bank Authorities are mandated under the Income tax Act to deduct the income tax at source on the fixed deposits if the amount exceeds the limit specified by the Income Tax Act. Tax will be deducted by the banks when the interest income exceeds Rs. 10,000/- in a financial year. Generally tax will be deducted at source. However, the tax rates on the income accrued also depends on the tax slab of the individual which is based on the earnings of overall income of the individual on an annual basis.
The question here asked comes under the concept of clubbing of income. Section 64 of the Income Tax Act, 1961 defines the under subsection (1) clause iv, the extract of which is given hereunder:
Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) if following conditions satisfied:
- The taxpayer is an individual
- The asset is transferred to his/her spouse (not house property).
- The asset is transferred without adequate consideration.
- There is no agreement between them to live apart.
The income raised from the transferred deemed to be the property of the tax payers if the above conditions are satisfied
As per the concept of clubbing of income under Income Tax Act, income accrued from the fixed deposits you made in the name of your spouse will be clubbed again to your income for taxation purpose. Such income is not clubbed with the income of your spouse. Even though you transfer your amount to your wife’s account (whether she is working or not working) and invested on fixed deposits, the taxation will be done on the original owner. However, this is not the case of compounded income. Compounded income is the income arising out of the clubbed income, but is not clubbed to the original owner’s income for taxation purpose. For example: in your question, income accrued on fixed deposits in your wife’s account, clubbed to your income. However, income earned from the fixed deposit interest by the way of any investment will not be clubbed in to your income, but will be clubbed in to income of your spouse.
Therefore, if you are a tax payer, and depending upon the amount of income accrued in a financial year from all the heads of tax sources of you, and based on the tax slab you fall under, the tax will be deducted on the last date of the financial year or TDS will be deducted on the interest accrued by the way of fixed deposits at the end of the financially year by the banks.
By Anitha Gutti